Practical Guide To International Debt Collection in the United States of America

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Is there a minimum amount to start a legal action?

It is important to note that the laws governing debt collection in the United States varies from state to state. Therefore, there could be 50 different sets of statutes and procedures governing the process, so the purpose of the information provided here is to provide overarching concepts and themes that are applied in multiple states. The author is based in Florida, so the focus of many of these answers will also have more specific information based on Florida law and procedure.

In the United States, there is no minimum amount required to begin the debt collection process, but the amount of the debt may determine where the collection case is filed—whether it is filed in state or federal court. Because debt collection stems from contractual or business relationships, those relationships would be governed by state law. There would be no independent basis to commence an action in federal court based on a federal statute, but if there is diversity as to the citizenship of the parties, then a collection action could be filed in state court, if the debt to be collected meets the jurisdictional threshold amount of $75,000. This action, however, would be governed by state rules. There are federal statutes, however, that can aid in obtaining discovery from parties that may be helpful in debt collection proceedings, and these will be discussed later. However, for purposes of these responses, unless noted otherwise, it will be assumed that most collection actions will be filed in state court.

State courts in the United States do not have threshold minimum amount, and thus, they can be used to collect debts of any amount. State courts generally provide for a small claims court where people can do their own legal work without an attorney. There are also generally two other “higher” court levels where an enforcement action may be brought, depending on the amount of the claim, as these courts have threshold monetary jurisdictional limits. The purpose of small claims courts is to try to make it affordable to collect a debt. Having to hire an attorney to proceed in either county or circuit court (the higher levels mentioned above) could be cost-prohibitive in terms of the decision to attempt to enforce or collect the debt.

Also, it is important to note that, absent a contractual or statutory provision that allows for the prevailing party to receive its reasonable attorneys’ fees, generally a party cannot recoup the attorneys’ fees it incurs as part of the debt collection process. Therefore, a cost-benefit analysis should be undertaken by a party prior to embarking on any debt collection process. This analysis should be done in conjunction with an analysis of the solvency of the debtor, to the extent possible.

Will the due amount condition the type of procedure?

As previewed above, the amount due determines the court in which the action will be commenced. Using Florida as an example, the small claims court is available for debts up to $8,000. The county court will handle claims up to $30,000, and then the circuit court will handle all claims above $30,000.

In county and circuit court proceedings, the general rules of civil procedure will apply, meaning that the regular rules of discovery and document production will apply. Parties can request documents that tend to prove up or disprove their claims, and they can take depositions of persons who have knowledge about the facts of the claims.

There are also interim measures that can be undertaken before a judgment is rendered, if the party seeking to collect a debt believes that the judgment debtor may be removing or hiding the assets, but that comes at a steep price that is often cost-prohibitive for the creditor, as a bond in twice the amount of the debt must be posted in order to obtain the interim measures. These will be discussed in detail later in this response. However, the same measures for which a bond is requested are very effective tools post-judgment, when a bond is not required. For instance, writs of garnishment may be obtained after a judgment that cause a court to freeze the amounts a debtor has in any bank or funds that are held by another party (like an employer) for the debtor. A creditor may also obtain a writ of execution or attachment that requires a sheriff to levy on any assets of the debtor. And, in Florida, judgment creditors can commence “proceedings supplementary,” which are actions against third parties that may have assets of the debtor. The creditor in such proceedings has wide latitude to obtain discovery from those parties and can get judgments against them.

In the United States, many states have adopted versions of the Uniform Fraudulent Transfer Act, which enables a creditor to seek the return of assets that have been transferred by a debtor to place them beyond the reach of the judgment creditor. This can also be an effective tool in the debt collection arsenal in the United States.

Is it mandatory to send a warning letter before taking legal action to collect a debt?

Sending a warning letter before starting legal action is generally not mandatory, but we recommend doing so. Depending on the contracts or documents governing the parties’ relationship, a warning or demand letter, as we call it, may be required. It is important to review the governing documents to ensure that the creditor comply fully with any notice or cure provisions in the documents before commencing a proceeding. Otherwise, a creditor’s failure to do so can undermine the strength of its case, giving the judgment debtor a potential defense to payment. Moreover, the date of the demand may well determine the rate of interest to be collected on any debt (for some mortgages, for instance, a default interest rate may not be charged until a demand is sent).

It is also advisable to send a demand letter to attempt to prevent the unnecessary expenditure of legal fees. Sometimes, the very fact that a demand letter has been sent by a lawyer may be enough to demonstrate that the creditor is prepared to use the legal system to collect the debt, and this may spark payment. Having the demand letter sent by the lawyer is not required, but it can be a helpful, subtle tool. Moreover, if the letter includes a demand for the preservation of all documents related to the debt, that will further put the debtor on notice that the creditor is prepared to pursue the matter fully and will lay the groundwork for any sanctions if it is later found that the debtor destroyed relevant documents after receiving notice of potential legal action.

An effective demand letter should specify the amount unpaid; the amount of any late fees or interest charged, including a brief description of how the interest was calculated and the per diem ongoing rate of interest that will be charged while the debt is still unpaid; the amount any legal fees to be charged (if applicable); and a reasonable deadline for payment before the commencement of any legal actions.

What are the best practices for creditors to increase the possibility to recover the debt?

Having the evidence to prove up one’s claim is always the key. Therefore, a creditor should retain copies of all contracts, invoices and delivery receipts, and documents showing payment history, along with any correspondence with the debtor. In today’s electronic age, it is important to remember to preserve emails and text messages with a debtor as well. To the extent any communications are done only verbally, a creditor should either follow up with an email or letter to the debtor confirming what was discussed or agreed, or at a minimum (but far less preferable), make a written note to be kept in the creditor’s file about what was discussed.

Further, to the extent possible, a creditor should make the effort to determine the debtor’s financial wherewithal to satisfy a debt before the creditor commences an expensive legal action and ends up “throwing good money after bad.” In the United States, however, it is often difficult to obtain comprehensive information about a debtor’s financial position. But at a minimum, one can check public records for other debts that may be more senior (like mortgages on real property or financing statements for personal property or equipment) or be indicative of a larger credit problem, like recorded judgments or pending lawsuits.

How can a foreign creditor start a procedure for international debt collection in the United States of America?

In a situation where the foreign creditor does not yet have a judgment against the debtor, the foreign creditor simply has to retain an American lawyer to represent its interests and file the lawsuit. The foreign creditor may first want to retain the American lawyer simply to send the demand letter before proceeding to filing a lawsuit. However, there is nothing extraordinary required beyond the retention of an American lawyer before the foreign creditor can file the lawsuit.

In a situation where the foreign creditor already has a judgment and is just seeking to collect the debt in the United States, the foreign creditor must first domesticate the judgment in the state where the debtor is located or has assets (or in multiple states, as necessary). Most states have adopted versions of the Uniform Out-of-Country Foreign Money Judgment Recognition Act, which provides a simple, straightforward method of recording a certified copy of the foreign judgment (with a certified translation if the judgment is not in English), and minimal information about the debtor. The judgment debtor is given notice of the recordation and a short period of time within which to object to the recording. There are limited grounds upon which a court cannot or will not enforce a foreign money judgment. However, it is important to note that collection activity cannot commence until the time for the debtor’s response has passed. After that time, the foreign money judgment is treated the same as a domestic judgment, and all of the methods discussed above can be used to collect that judgment, such as writs of garnishment, execution, and attachment.

Which documents are necessary for the debt collection in the United States of America?

The plaintiff always bears the burden of proof for its claims, so for debt collection, the creditor should be able to refer to and rely upon the contracts, unpaid invoices, or other documents that demonstrate that a debt is owed. If, for some reason, the creditor does not have any of those documents, but they are in the possession of the debtor, then the creditor may rely on the discovery process to request such documents. However, generally in most American courts, the contract or invoices upon which a claim is based must be attached to a complaint, so if the creditor does not have the document, the creditor will have to demonstrate why it does not have the documentation.

Before judgment is entered in favour of any creditor, some type of admissible evidence, whether documentary or sworn testimony, will be required. And, if the evidence is documentary, that evidence must have been presented to the court and authenticated via the sworn testimony of a witness who has knowledge of the document or is otherwise in a position to attest to the regular business records of the creditor.

What happens after the first demand for payment?

If the creditor has elected to send a warning or demand letter, then there are the following alternatives: (i) the debtor will pay the amount demanded; (ii) the debtor will respond and advise why the creditor is not entitled to the amount demanded or why the debtor cannot pay that amount; (iii) the debtor will respond and a negotiation will begin as to repayment terms; or (iv) the debtor will not respond.

The creditor must decide how to proceed in each of those scenarios, other than the receipt of payment in full. The creditor may want to engage in negotiations regarding a repayment plan or a restructuring of the debt, or it may elect to commence a lawsuit. If the debtor denies the debt or does not respond at all, the creditor can at any time, up until the statute of limitations on enforcing the debt runs, file an action to enforce the debt. For contracts and relationships governed by Florida law, there is a five-year statute of limitations running from the date of the breach (four years if there is no written contract). Other states, such as New York with a six-year statute of limitations on contract claims, have different time periods, so it is important to keep track of any such deadlines, especially if a creditor elects not to act immediately to pursue payment.

Can interim measures be taken?

As previewed above, there are certain limited interim measures that can be utilized. However, those depend on the language of the parties’ contracts and/or the creditors’ financial wherewithal or determination to pursue all avenues, no matter the cost.

First, some contracts give creditors the right to replevy or take back certain equipment that has been financed or pledged as security in the event of a breach, if (and this is an important if) it can be done peacefully and without a breach of the peace. In situations involving certain types of goods that fall under the scope of the version of the Uniform Commercial Code, there are certain methods that may be used by creditors to obtain repayment or minimize their losses, such as directing third parties to send their payments directly to the creditor when those payments are related to the debt owed to the creditor, but again these require that the creditor not breach the peace. As a result, it is often necessary for a creditor to commence a lawsuit because such “self-help” measures cannot be done peaceably.

Once a lawsuit has been filed, there are certain interim measures that may be utilized in order to either freeze money or seize collateral. However, the creditor must be able to demonstrate (via sworn testimony) that it has a fear that the debtor will leave the jurisdiction with the creditor’s collateral or otherwise dissipate funds necessary to satisfy a judgment. The standard here is not mere speculation. The creditor must be able to demonstrate convincingly that it has a reasonable belief based upon actual circumstances that interim measure are necessary to And, assuming that the creditor meets those requirements, courts generally require that the creditor post a bond or security in twice the amount of the debt sought, so as to protect the debtor against any losses resulting from the improper seizure or freezing of its assets. Therefore, by way of example, if a creditor is owed $500,000 on a distribution contract, it would have to post a $1 million bond to obtain a prejudgment writ of garnishment (to freeze funds) or prejudgment writ of attachment (to freeze personal property) or similar injunctive relief. Because of the expense associated with such efforts, creditors with limited funds do not normally employ these tactics.

Depending on the circumstances, a creditor might also be able to request the appointment of a receiver to manage the assets of the debtor or collect rents or accounts receivable. While having a receiver in place may ensure that the debtor’s collections continue and that its assets are preserved, the cost of the receiver will have to be considered. The receiver is generally either paid from the assets of the receivership, or the court may require the plaintiff (the party that requested the services) to be responsible for at least a portion of those services. Under either scenario, a creditor may conclude that the disadvantages outweigh the benefits.

The United States generally does not afford creditors the broad ability to obtain freezing order or “Mareva order” prior to obtaining a judgment. However, the submitting attorneys have been able to obtain a domestic court’s enforcement of a foreign freezing order, but a bond was required (in less than the amount of the anticipated judgment).

Lastly, another “interim measure” that may be helpful to foreign creditors is the use, in federal court, of 28 U.S.C. § 1782, which empowers the federal court to require persons within its jurisdiction to provide testimony or produce documents to assist in a foreign case. Therefore, if the foreign creditor has a debt collection proceeding pending in another country against a debtor that has individuals with knowledge or documentary evidence present in the United States, then it may be able to utilize that provision in order to obtain evidence to support the creditor’s claims in the foreign jurisdiction.

If the recovery was not possible for any reason, is there any other action that the creditor could take to write off such debt in its accountancy?

In general, for a creditor to be able to take a deduction for a bad debt in its taxes, one must look to the creditor’s accounting methods—whether the creditor uses an accrual or cash method. If it uses an accrual method, then the debt is treated as “taxable income” as soon as it is billed (when it is accrued), regardless of whether the amount is collected. Under the cash method, the debt is not considered income until it was received, so if it is never received, there can be no deduction. (There are exceptions to this rule when advances are made to suppliers, but those are not discussed here.) However, if the creditor uses the accrual method, then it may be able to take a deduction for the bad debt if it can demonstrate that the debt has become worthless and at least reasonable steps were taken to collect on the debt. Such information as to collection efforts would have to be submitted to the taxing authority, which will be responsible for making the determination as to whether to allow the deduction or not.